Understanding Company Share Option Plans (CSOP)

What is a CSOP?

A CSOP is a discretionary option scheme that grants participating employees the right to purchase company shares in the future at a predetermined price. This enables those employees to benefit from increases in share value over time.

CSOPs serve as an attractive alternative for companies that do not qualify for an Enterprise Management Incentive (EMI) scheme, often due to their size or trade classification. Notably, overseas companies can also leverage CSOPs to grant options to their UK-based staff.

Tax benefits of a CSOP

A CSOP provides substantial tax advantages for both employees and employers:

• Employees or full-time directors can be granted options to buy company shares worth up to £60,000 at the date of grant.
• There is no income tax or National Insurance Contributions (NIC) on the grant of the option.
• No income tax or NICs are payable upon exercise, provided it takes place after three years or due to an involuntary event such as illness or redundancy.
• CSOP options must not be granted at less than market value.
• Upon sale of shares, gains are taxed under Capital Gains Tax (CGT) at:
  • 18% for basic rate taxpayers
  • 24% for higher rate taxpayers

If Business Asset Disposal Relief (BADR) conditions are met in respect of the shares, BADR may further reduce CGT, provided the shares are held for at least 24 months post-exercise and the employee holds at least 5% of the company’s income, assets, and voting rights.

Additionally, a corporation tax deduction may be available, equal to the gain made on exercise.

Why use a CSOP?

CSOPs offer flexible, cost-effective, and tax-efficient ways to reward employees. Unlike cash bonuses, they do not require an immediate cash outlay, reducing financial strain on businesses while delivering long-term employee benefits.

Key advantages of CSOPs include:

• Improved retention and motivation – tax incentives for holding options beyond three years can encourage long-term commitment.
• Alignment of interests – performance-based vesting conditions ensure employees and shareholders work toward shared business goals.
• Attracting top talent – in competitive job markets, CSOPs serve as an appealing incentive to prospective employees.

Performance-based & time-based conditions of CSOPs

Employers can tailor CSOPs with performance-based conditions, linked to:

• Company-wide financial targets
• Subsidiary or departmental performance
• Individual employee milestones

The value of shares upon exercise will reflect company performance. If an employee leaves before their options vest, they typically forfeit their options, making CSOPs an effective tool for retention.

Speak with our specialist Equity reward team

Our team of specialists has extensive experience in share scheme design, helping businesses navigate the complexities of CSOP implementation.

Our end-to-end service ensures a smooth, hassle-free process, covering:

• Qualification and design of the scheme
• Valuation and documentation
• Option granting and HMRC registration
• Ongoing compliance and reporting

We have supported numerous companies in leveraging share schemes to enhance employee engagement, boost performance, and maximise tax efficiencies. If you’re considering a CSOP, please do not hesitate to get in touch.  

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